New additions to the VAT Law for digital service providers
Beginning 1 January 2021, new regulations that will impact non-resident digital service providers without a permanent establishment in Mexico will become effective. You will remember that beginning 1 June 2020 such providers had to start charging 16% Value Added Tax (VAT) on digital services they provide to recipients in Mexico.
The main change is related to the penalties for those digital service providers that do not meet their Mexican VAT obligations.
Under the new regulations, penalties are set forth that include the temporary cancellation of their access to public networks in Mexico, known as a “kill switch”, for those providers that fail to meet the obligation to pay 16% VAT in Mexico, as well as for those that do not meet other tax obligations, such as reporting information concerning digital services rendered to recipients located in Mexico, the withholding of VAT, income tax, and other things.
Moreover, fines are set that range from 500,000 to 1,000,000 Mexican pesos (approximately USD 25,000 to USD 40,000).
Given the severity of the penalties applicable under the new regulations, it’s important for non-residents without a permanent establishment in Mexico that render digital services to Mexican recipients to discuss the matter with their advisors in BDO Mexico so that they are aware for their tax obligations.